00:00:00 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. 00:00:36 Speaker 3: Begin this hour with stocks and bonds Steady as CPI e is the September rate high beds. 00:00:40 Speaker 1: The next read on inflation. 00:00:42 Speaker 3: Out at eight thirty am Eastern with PPI on deck. GOLDBNZACS vice chair and former Dallas FED President Robert Kaplan joins us now from more. 00:00:50 Speaker 1: Robert, great to catch up with you. 00:00:52 Speaker 3: I want to start just by asking you your take on the economy and whether you are surprised by the relatively weak labor market report and then the very much inline yet confusing CPI report. 00:01:05 Speaker 4: What I'm seeing in the economy if it's associated with the AI Infrastructure build or AI adoption, then it's strong. What I hear from a number of companies who are more tied to housing autos the strength of the low modern income consumer. I would say they describe the economy as okay, not great, somewhat sluggish, and so in that regard, the job market report kind of was in line with that. You don't see aggressive hiring, but you don't see aggressive firing. And I still think we're several months or a year away from companies having enough confidence in the AI use cases to work aggressively use AI to replace people, but that is likely to happen. I think they'll be new jobs created also. But the point is unit labor costs are very well behaved, and I think you and I have talked about this. The share of GDP going to profit is increasing, the share going to labor is more muted. 00:02:15 Speaker 1: What's the FED role given this backdrop right now. 00:02:19 Speaker 4: So you've got a lot of cross currents, and in fairness, if we didn't have the war in Iran and the spike in oil prices, which I think has raised headline inflation and bleeds into other items, my guess is we might not be even be talking about the prospect of a rate increase, and I think the FED role here should be to try to understand these cross currents. The AI infrastructure build is probably inflationary, and you've got tariffs, labor constraints, oil spike that exacerbate that. On the other hand, AI adoption should all ultimately be disinflationary. Chinese over capacity should be disinflationary. And so it's not surprised to me that there's a lot of debate they're trying to weave through this. I think what I would be doing in my former seat is I would not have raised rates in July. I think they made absolutely the right decision. I probably wouldn't have cut in December either, by the way that last cut I would not have done. And I would be keeping an open mind between now in September. If I see meaningful improvement, I might be willing to kick the can and do nothing. But I want to take every bit of time between now and September before I make a judgment and avoid being rigid or predetermined in assessing this. 00:03:40 Speaker 3: People talk about the death of forward guidance, and part forward guidance has no role at a time where no one knows what's going to happen, and it's very hard to predetermine what exactly could transpire. At the same time, reaction function does seem to be important. And from your vantage point, Rob, what would you be looking for to see that there is some sort of departure from this mess, this muddle, to something that is more of a protracted, persistent inflation. 00:04:05 Speaker 4: So the term forward guidance gets used very broadly. What it started out as is I'm going to make a current commitment today to a future action BERNANKI used it during the Great Recession. I think over used it in the fall of twenty twenty and into twenty one in committing to keep rate slow until we reach full employment. I dissented on that, but I think the FED has learned it's less than there and is much more reluctant to use that type of forred guidance. Now, what forward guidance seems to mean is I don't want to over predict. I agree with that too, and I always say that fed's job is to be a risk manager, not a prognosticator. Having said all that, I do think in the press conferences you ought to be able to explain why you made the decision you made and ribe what the pros and cons and what the debate was. And I would probably like to see that more in future press conferences, and I think that would illuminate the debate that's going on, and I think that would be useful. And I don't think that box is in the Fed at all. 00:05:17 Speaker 5: Do you think that there's an understanding of the reactionary function right now of this Federal Reserve. 00:05:24 Speaker 4: I think the understanding comes from individuals giving speeches about their reaction function. And I actually think, in fairness to Chair Warrish, he's been gently counseling people on the committee. Don't over predict what you're thinking, don't over explain it. You're going to box yourself. I actually think that's good advice. I think in the future, I think a little bit more explanation from the Chair to help frame all this, I think would be useful. And I would think and hope over the next several months you probably will get that. 00:06:03 Speaker 5: Do you think there's now more emphasis around his jackson Whole speech given. 00:06:07 Speaker 4: All of this, Listen a time FED chair speaks, there's a lot of attention. The jacksonvill speech historically is a little bit of a five hundred thousand foot philosophical speech. I think because of his confirmation hearings and what he's done in the first two press conferences, you've already gotten a lot of philosophical views from Chair Warsh, So I think in this speech I would give some of the philosophical but I might do a little bit of a if it were me, and he may not follow this, I might insert four sentences to explain why we made the decision in July that we made. You know, we thought inflation readings were cooling. We're aware that this is not an excess demand situation. That's my view. In the economy, it's more of a supply driven, capex driven and in that regard, and we have the special situation of the war, and in that regard, a majority of the voters decided on the committee decided it would be best to be patient but will remain vigilant. I would insert something like that to just so he can get the framing and the July decision out there. But that's me. Otherwise, I don't think it's going to get any more attention than any other Jackson Ole speech, which always gets a lot of attention. 00:07:28 Speaker 3: Rob, how worried are you about today's thirty year auction coming out, the twenty five billion dollars of thirty ye notes sold by. 00:07:33 Speaker 1: The Treasure Department. 00:07:35 Speaker 4: Yeah, so this is where you've got diverging pass There's the debate at the FED and GE is the FED funds rate ultimately need to be somewhat higher. But if it needs to be higher, we're talking about over the next year to you know, fifty seven, I don't know, fifty seventy five base points. We'll see. The Fed will figure it out. May not be pretty, but they'll figure it out. The part that's that I'm struggle with more and I think the markets are struggling with the long end of the treasury curve. This is true of government bond curves globally. I think are struggling with something else. They're struggling with supply demand of treasuries. The size of these deficits. Are the deficits going to start moderating. In a solid economy, you would normally think that deficits would moderate somewhat. These deficits are not moderating. And I think you're seeing a global backup, not just US, global backup of the long end of the curve. Some people have attributed to the FED, but I actually don't think so. I think this is a different It is a structural dynamic. And normally, when the economy weakens, you would typically expect the long end of the treasury curve to rally, or if there's a geopolitical event, you expect a flight to quality in a rally. Hasn't been acting as much that way, I would argue in the last year and a half two years, I think we have a new structural development, and I think I think it's appropriate to be wrestling with that a little bit. 00:09:05 Speaker 3: Just real quick here, Rob, what would you be more bullish on going into the next year? 00:09:10 Speaker 1: Bonsor stocks? 00:09:12 Speaker 4: Well, there is a great earn as you've been reporting, and we're seeing it. There is a great earning story that's unfolding. And the economy, yes, is being stimulated by AI infrastructure. But broadly, every company I talk with has got twelve to fifteen use cases on AI adoption and is optimistic that they're going to find ways to improve margins, improve their business, improve productivity. And so I think the SMP broad earning story is alive and well for not just this year, but into the future. I'm a little more nervous about whether we can get these deficits under control and what's going to happen to the long end of the government bondker. 00:09:57 Speaker 2: Stay with US, Multilomberg diviance coming up. 00:10:00 Speaker 3: Off to this, we do want to turn to tech a big part of the story as well this morning, the AI trade regaining momentum as hyperscalers double down on infrastructure spending even as memory chip prices skyrocket. Angelo Zeno of CFRAA writing there are no signs that pricing increases will ease across the semi space, with risk of more upside to pricing in twenty twenty seven, especially for memory, compute and networking. 00:10:33 Speaker 1: Angelo joins us. 00:10:33 Speaker 3: Now for more, Angelo, you know everyone's been talking about this, the inflationary pressures, the chipflation on the horizon, and then Cerebris came out and demonstrated a lackluster demand relative to expectations for its wafers sort of specialty chips. 00:10:47 Speaker 1: What do you make of that? Are not all chips created equal? Is that essentially what we're learning? 00:10:53 Speaker 6: Yeah, I mean, and Lisa, thanks for having me. So you look at Cerebras is a little bit of a different story. Actually, they they don't take part in a lot of this other stuff in terms of the high bandwidth memory. Actually they don't use high bandwidth memory at all. So they're more of a unique beast out there. And you know, that's a company where just the expectations are just absolutely insane. The valuation has you know, is insane as well. So it's the name we've stayed away from. So when we kind of look at that name, maybe relative to what you're seeing across the broader chips face, it's probably not a good reflection of what you're seeing out there as far as kind of, you know, our expectations going out here over the next you know, couple of quarters. I mean, we expect the market to continue to be supply constrained in nature. Obviously memory is going to be, you know, the key item to watch because that is where the biggest bottleneck is at this point in time. And as we kind of look ahead, let's call it over the next six to eight quarters, at the very least, the demand trajectory remains very strong. But also when you look at these next gen servers that are coming out, and that's extremely key the content growth of memory required in these next generation servers continue to go up exponentially, and as a result, that's what's going to keep the market tight. That's what's going to keep us in a supply deficit, and as a result, we're going to see higher pricing, not to the magnitude at least though, that we've seen over the last nine months. 00:12:18 Speaker 3: At the same time, we are seeing some of this get priced in from the socks. We're seeing a huge recovery there the costbe on absolute steroids here gaining some twenty one percent since the lows over in July. How much is this a fundamental reassessment that, yes, the chip story and chiflation very much is real, a chip shortages will persist, And how much is this a leverage story one of increasing confidence in valuations because of steps that the Korean regulators have taken. 00:12:46 Speaker 6: Yeah, I mean listen, I think when we think about memory in general, memory has always been an extremely volatile area of the market. So when you kind of look at what's going on specifically in South Korea, I'd say it has more to do with kind of some of the rige issues going on, and again just a lot of the volatility that we typically see in memory. So that's just going to be an area of the market, in an area of the world that you're just going to expect and get comfortable with having that volatility out there. And similar here in the US. I mean, memory is going to when you think about a micron or sand disk and what have you. Given the uncertainty about that future earnings trajectory of these companies, just expect that pocket of the market to continue to be more uncertain in nature, but also also understand that there's greater earnings leverage in those companies as well, so you know, with greater risk also comes greater reward. 00:13:39 Speaker 5: Angel how much more expensive is Christmas going to get this year? 00:13:43 Speaker 6: Oh, it's going to get expensive, right, I mean you kind of think about what we saw, you know, I think Apple might have you know, kind of had the best kind of indicator out there in terms of what this is going to look like later this year in terms of raising those prices back earlier this summer, and again indications are in September when they do have that hardware event next month, is iPhone prices probably go up at least one hundred and fifty dollars across the board for those pro devices and our view potentially more so, you know, when you kind of think about that, and I will say this looking at different electronic devices. You know, whether or not consumers will continue to buy remains to be seen. But I think smartphones, at least the high end of the market will be a lot more resilient in nature, because I don't think you have the sticker shock as much as maybe you have in other areas like PCs, which I think will be a lot more constrained in nature. Not to mention, they're just not going to be able to get their hands on certain components, So consumers are going to be forced to kind of move up in terms of the cost curve and pricing curve there, and there are going to be many out there that just won't be able to do it or won't want to do it. 00:14:51 Speaker 5: I know, hard to predict, but potentially this year going to be the start where you see demand. 00:14:56 Speaker 6: Destruction on the consumer side. Yeah, I mean absolutely. So, you know, we're looking for you know, PC demand at least on a unit basis to decline meet mid teens. Smartphone demand again also will decline this year as well. It'll be interesting to kind of see how twenty seven looks again, I'd say expect another flat to down type of year next year. So I do think you're going to see some demand destruction at least from a unit perspective. But in the same respect, you know these companies are offsetting that to an extent by increasing prices as well. 00:15:30 Speaker 2: Stay with us, Mulblindex. Savanta's coming up off to. 00:15:34 Speaker 1: This right now. 00:15:44 Speaker 3: Actually you're seeing the chances of a FED rate hike increase now about forty chance there. 00:15:49 Speaker 1: Could be a rate hike at September. 00:15:52 Speaker 3: Right now, joining us is Lydia Mashburn, Newman of the American Institute for Economic Research. 00:15:57 Speaker 1: Lydia, thank you so much for being with us. I'd love your. 00:15:59 Speaker 3: Take on two prints CPI and PPI. Not exactly conclusive, but pointing in the direction that there is some disinflation coming at least through prices currently. 00:16:10 Speaker 7: Yeah, we definitely got some reasonably good data, at least from a headline standpoint, and especially the core numbers. But I think there's some caution to be had in here. While these prints maybe are a little bit encouraging, they might give the doves some wiggle room to stay to keep on hold for now, we need to look both a lot of especially the year numbers we're talking about starting from a data point that was higher a year ago, largely due to trade issues, and so we should be a little bit cautious about that number. But we also need to be looking at these numbers are going to be feed the PPI numbers are going to be feeding into CPI and we'll get that print before the next meeting. And really what we need to be looking at are things outside of the energy trade sectors. When we look at services and flat and CPI we're still at three point zero percent. These are things that indicate that the demand side of the economy still has a lot of pressure, and that's the part that the FED can and should do something about. And so I really think we need to be cautious here. You're also seeing this in the NGDP numbers that came out. This is another place where the FED can really look at how accommodated their policy is. And we're hitting six point five percent on an annualized basis, where at almost seven point nine percent, and this is well above the pre pandemic trend of about four to five percent depending on. 00:17:31 Speaker 4: How you slice it. 00:17:32 Speaker 7: And so all this says to me that maybe Beth Hammock is right. The FED maybe should pump the brakes a little bit and hike by twenty five basis points sooner than later. Otherwise markets are going to be getting I think, much higher harsher hikes over the medium and longer term. 00:17:48 Speaker 1: Via Stay Closed. 00:17:49 Speaker 3: Michael McKee has more he's been looking through the data, Mike, what do you see. 00:17:53 Speaker 8: Well, there's two things that people are concerned about, and one is energy. Energy prices we're down three point one percent, which is the biggest reason that we saw the kind of results we got on the headline, the flat change. But then the other thing about PPI is the economists go into it and look for the categories they get fed into PCE and there's sort of offsetting news here. Relatively flat healthcare services, although some areas are portfolio services though up six and a half percent more than anticipated. Obviously, when Wall Street does well and there's been a lot of churn on Wall Street, those prices go up. But airline passenger services were down three point four percent, which is a carry on from the energy situation, as jet field prices fall and airline ticket prices fell. So the offset is a slightly higher PCE it appears, and I haven't done the math. I'm just eyeballing this back of the envelope. But that's the concern is it doesn't really matter what PPI and CPI say in the end for the FED and for those who are hawks, it matters what PCEE does. And it looks like PCE going to come in a little higher than both the CPI and PPI. 00:19:04 Speaker 1: Michael McKay, thank you so much. 00:19:05 Speaker 3: This explains also why you are seeing a greater chance of a rate high in September slightly getting priced in Lydia. What do you make of the argument that this is not coming necessarily from the labor market. You're not seeing the wage pressure that would create some sort of spiraling inflation. And so even if we do see an increase in these other parts, even aside from energy, but it's tied to AI or tied to just the wealth effect, that this is something that the FED can look through. 00:19:34 Speaker 7: The FED really, you know, they ought to and need to look through all of the energy shocks and even the terish that are on again. But what we're seeing with the wage situation, I know, it's a great thing that we're not seeing wage pressures and that can lead to an inflationary spiral. But also think about this from the standpoint of the consumer. The consumer is they don't get to just analyze away the energy shocks or the higher costs from tariffs. 00:20:00 Speaker 1: They're having to deal with. 00:20:00 Speaker 7: Those in real time and their wages are not keeping up with that. But the FED can't fix that problem. Lower rates doesn't help the average wage earner in this particular climate, at least not on any sort of long term basis. The best thing the FED can do for both the labor market and for inflation is to restore his credibility for price stability. This is something worsh has promised that he will do, although I think his last press conference it felt like he was maybe being a little bit wishy washy about how the FED or when the FED would actually get to restoring that two percent inflation target and get that credibility back. But we've been playing a lot of gay games. As Mike was just pointing out, the PCE is the target, that is the fed's official target, and we've been spending a lot of time parsing the data, trying to pull out the energy shocks, trying to look at core or super core, and it's more like we're changing metrics in order to fit the FED into two percent, and when really the FED ought to be doing things that really reduce things on the demand side of the economy, where we really are still seeing an over a bit of a at least too much easing, too much accommodation, maybe not a full overheating. And these are things that FED really ought to look at. 00:21:15 Speaker 4: Very very carefully. 00:21:16 Speaker 5: What are you saying in order for the Federal Reserve to have credibility it has to be a September hike. 00:21:21 Speaker 1: Is that the only way. It's not the only way. 00:21:25 Speaker 7: I think the FED could also maybe start talking about maybe returning to a slow roll off of its balance sheet. It doesn't only have an interest rate tool, as Worsh himself pointed out, But I don't think they should be afraid of a twenty five basis point hike. If not in September, then October. We are The Aier's Monitor and Neutrality report really shows that the FED is definitely in the two loose category. And as you've had many commentators on this show say, a twenty five basis point increase isn't really going to rock the boat that much, so why not get ahead of the game a little bit here to try to deal with It's actually more behind the game to deal with some of these inflationary pressures that have existed since the pandemic and aren't even necessarily related to all of the changes in policy and due to the crisis in the conflict in the Middle East. 00:22:18 Speaker 2: This is the Bloomberg Survendics podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.